September 3, 2014 / 7:23 AM / 5 years ago

UPDATE 1-Iron ore at two-year low as China traders desert market

* Mills destocking in absence of positive economic news

* Iron ore prices could see further falls - trader

* NDRC calls for more transparent pricing mechanisms (Updates prices)

By David Stanway

BEIJING, Sept 3 (Reuters) - Iron ore prices have fallen to their lowest point in two years as cash-strapped Chinese traders desert the market amid flagging property sales and a growing supply glut.

Traders continue to await fresh measures from the central government either to stimulate the economy or close down poorly performing steel mills.

“My personal point of view is that the market is still in a destocking phase and prices still have room to fall further,” said a steel and iron ore trader based in the eastern Chinese province of Zhejiang.

“Overcapacity is still the major problem and it can only be tackled by reducing supply or raising demand,” he said.

Benchmark 62 percent iron ore for immediate delivery into China .IO62-CNI=SI fell another 0.5 percent to $86.70 per tonne on Tuesday, matching the lowest point of a price fall in September 2012. Iron ore has fallen nearly 36 percent since the turn of the year.

The most traded rebar contract on the Shanghai Futures Exchange sank 2 percent on Wednesday, hitting a new low of 2,853 yuan per tonne. The most active iron ore contract on the Dalian Commodity Exchange finished at 605 yuan per tonne, down 3.35 percent.

Big supply increases from Australia have raised the country’s share of China’s total iron ore imports to 57 percent in the first seven months of 2014, up from 51 percent last year, the main reason why prices have fallen so rapidly.

“Structurally, prices have adjusted lower because we have this big surge of new supply coming in that has displaced some of the other tonnage - this has reset the average price level for iron ore,” said Graeme Train, analyst with Macquarie in Shanghai.

“We saw a build-up in inventory throughout the supply chain earlier this year, but now the macro data has peaked, mills and traders are letting their inventory go. These up and down movements are occurring around an average that is much lower than before.”

If more cheap supply comes in to the market in the coming weeks, then prices might not start to rebound even when traders and mills begin to restock, he said.

The National Development and Reform Commission (NDRC), China’s state planning agency, urged miner BHP Billiton in a meeting this week to improve the transparency of its pricing system and cooperate more with Chinese enterprises when it came to setting prices.

“Amid changes in the relationship between iron ore supply and demand and as prices enter into a declining phase, (we) should proactively seek new pricing methods,” the NDRC quoted an official as saying at the meeting.

Rebar and iron ore prices at 0710 GMT Contract Last Change Pct Change SHFE REBAR JAN5 2853 -58.00 -1.99 DALIAN IRON ORE DCE DCIO JAN5 605 -21.00 -3.35 SGX IRON ORE FUTURES OCT 84.67 -2.29 -2.63 THE STEEL INDEX 62 PCT INDEX 86.7 -0.40 -0.46 METAL BULLETIN INDEX 87.4 -0.22 -0.25 Dalian iron ore and Shanghai rebar in yuan/tonne Index in dollars/tonne, show close for the previous trading day (Editing by Richard Pullin and Biju Dwarakanath)

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